Diverging Credit Trends Between Financials and Industrials
Investors reduce financial holdings as they re-evaluate risks associated with mortgage scandals, while industrials were well bid following strong earnings reports.
Last week, the Morningstar Corporate Bond Index was unchanged at +159; however, this masked a change in the underlying components. The financial sector generally widened as investors reduced holdings as they re-evaluate risks associated with mortgage scandals. Industrials, especially intermediate maturities, were well bid as strong earnings reports provided support for the sector.
Bank of America (ticker: BAC, rating: A-) continued to bear the brunt of widening in financials because of its prominence in the headlines regarding the mortgage scandals. Bank of America's five-year credit default swaps widened another 10 basis points to +205, the widest level since July 2009. As a point of reference, the five-year CDS was +154 as recently as Sept. 30. While the spread widened to account for the heightened headline risk, the credit market does not appear to be pricing in a significant increase in near-term default risk. The one-year CDS ended the week at +119, flat with the prior week, and the curve between the one-year and five-year has stabilized in the mid-80s compared with the low 70s a month ago. If the market were pricing in a near-term jump to default risk, we would expect the one-year CDS to be significantly higher and inverted to the five-year.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.